By Paul R La Monica, CNN Business
Things are looking terribly grim out on Wall Street.
Traders take big bets against retailers as recession fears gather momentum. According to S&P Global Market Intelligence, investors are becoming more skeptical about energy stocks after the rise in oil prices. And investors are betting on healthcare as interest rates start to rise.
Short sellers are starting to bet on a slowing economy — and against a number of industries that have been performing well recently. This is where near-term interest is creeping higher.
consumer stocks
Bearish investors avoid consumer stocks in part because they fear that rising prices will eventually lead to an economic slowdown, perhaps even a recession.
“Consumer discretionary remained the most severely shortened sector in mid-March, largely due to the impact of rising inflation on non-essential demand,” S&P said.
The short interest rate level — the percentage of stocks held by investors betting that a stock will fall — rose to 5.24% in consumer discretionary stocks. This is the highest level since mid-January 2021.
Retailers Big 5 Sporting Goods, Citi Trends and Camping World Holdings were among the most severely trimmed consumer stocks as of mid-March, according to S&P. Likewise, the electric vehicle manufacturers Arcimoto and Workhorse Group.
oil stocks
Investors aren’t just nervous about consumers. They also seem to believe that skyrocketing oil prices will soon abate, which could hurt energy companies’ earnings and share price momentum. Chevron’s stock, for example, is up almost 40% this year, making it the best performer on the Dow.
“Short interest in the energy sector, which has prompted bets that historically high oil prices are unlikely to last, rose to 3.91% in mid-March, the highest since mid-October 2020,” S&P added.
S&P hasn’t listed any specific energy companies that short sellers are circling. But oil equipment and drilling firms Transocean, Nabors and Helmerich and Payne all had high levels of short interest, according to an analysis of companies CNN Business conducted using Refinitiv stock screening tools.
So are oil and gas companies like Warren Buffett/Berkshire Hathaway’s new favorite Occidental Petroleum, EQT, Southwestern Energy and Chesapeake.
Still, some are wondering if investors betting against oil will suffer if the Russia-Ukraine conflict doesn’t end soon.
“Oil prices will certainly continue their journey north, making oil companies more profitable in the coming quarters,” said Ipek Ozkardeskaya, a senior analyst at Swissquote, in a recent report.
“The rising short stakes also mean an increasing risk of a short squeeze, where investors who have been betting on prices falling decide to close their positions — and closing a short position involves buying back the stock,” she added added and noting that short squeeze has been driving meme stocks like GameStop and AMC sharply higher since early 2021.
Healthcare stocks
Healthcare stocks are also being targeted by dour investors. The sector has benefited from the Covid-19 pandemic, but as more people get vaccinated and refreshed and have access to new pills that can treat coronavirus patients, healthcare companies are becoming less attractive.
Many investors have flocked to healthcare stocks, believing the industry is a safe, defensive bet when the economy slows. But healthcare stocks could also lose appeal for conservative investors looking for solid dividend yields, while Federal Reserve rate hikes are likely to make long-dated Treasuries more attractive.
Diagnostics companies Quest and PerkinElmer, pharmaceutical company Jazz Pharmaceuticals and medical device maker Tandem Diabetes were among the top-performing healthcare stocks, according to Refinitiv.
Banks are left out
Interestingly, bank stocks are not being raided by short sellers. It seems investors are hoping that further interest rate hikes will improve lending profitability for the financial sector. The financial services sector saw the smallest increase in short-term interest rates through mid-March, according to data from S&P.
“Financials were the least trimmed sector, likely on bets that the banking sector will benefit from multiple Federal Reserve rate hikes this year and next,” S&P said.
According to futures, which track interest rate forecasts, traders are pricing in a more than 80% chance that short-term rates will be at least 2.5% to 2.75% by the end of 2022. That’s an increase from the current 0.25% to 0.5%.
Major banks will start releasing their first quarter results next week. JPMorgan Chase, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley will all be listed for the week of March 11th.
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